Question

On January 1, 2019, Tonika Company issued a four-year, $10,000, 8% bond. The interest is payable annually each December 31. The issue price was $9,676 based on an 9% effective interest rate. Tonika uses the effective-interest amortization method. The interest expense on the income statement for the year ended December 31, 2019 is closest to:

Answer 1

Answer:

$9,747

Explanation:

Tonika company issued a $10,000, 8% bond

The issue price was on the basis of $9,676 on 9% effective interest rate

The first step is to calculate the discount amortization

Discount amortization= Interest expense-Interest paid

Interest paid= $10,000×8/100

= $10,000×0.08

= $800

Interest expense= $9,676×9/100

= $9,676×0.09

= $871

Discount amortization= $871-$800

= $71

Therefore, the book value at the end of December 31, 2019 can be calculated as follows

= $9,696+$71

= $9,747

Hence the interest expense on the income statement for the year ended December 31, 2019 is closest to $9,747